Devil in the detail: BVerfG, Coronabonds and EU budget

It’s a very busy week for the European Union.

Yesterday, the German Constitutional Court partly dismissed ECB QE case. It confirmed there is no breach of monetary financing of governments - which is the most important point – but it also asked the ECB to justify bond-buying program.

“Following a transitional period of no more than three months allowing for the necessary coordination with the Eurosystem, the Bundesbank may thus no longer participate in the implementation and execution of the ECB decisions at issue, unless the ECB Governing Council adopts a new decision that demonstrates in a comprehensible and substantiated manner that the monetary policy objectives pursued by the PSPP are not disproportionate to the economic and fiscal policy effects resulting from the program”.

Asking for an impact assessment of the ECB monetary policy is ironically the most EU thing ever. Our understanding of the 3-month period given to the ECB to “fix QE” is that the ECB basically needs to provide documentation demonstrating there is a balance and proportionality between the policy objectives and the policy effects. Immediately after the ruling, the ECB received many messages of support, notably from the EC which reaffirmed that the ECJ’s decision of December 2018 stating that QE is legal is binding on all national courts (see here the ruling). In our view, the German Court ruling is mostly a shot across the bow that does not really challenge the ECB ability to continue both APP and PEPP or seriously question the Bundesbank participation to these programs as long as they are viewed as temporary. This interpretation is corroborated by the ECB’s statement released yesterday evening indicating the central bank takes not of the ruling but “remains fully committed to its mandate”. However, it certainly does not close the door to further legal actions in the near future regarding PEPP and the flexible manner in which purchases are done. The legal saga continues.

The testy debate over coronabonds is probably closed. Earlier this week, France’s finance minister Bruno Le Maire confirmed to a French newspaper that he will not go ahead with coronabonds if Germany does not endorse the project. Officially, France does not want that an initiative supported only by a group of member states leads to a fragmentation of the euro area. This is certainly a very good argument. The unofficial reason for dropping the idea of coronabonds is also that France does not want to pay the risk premium resulting from debt mutualisation with countries perceived as financially more vulnerable. Such a reversal of position is not surprising as France’s European diplomacy has basically consisted in asking for the maximum and ultimately accepting the bare minimum over the past six years.

The risk is elevated that the EU budget will be a new missed opportunity.

Following the European Council’s decision of 23 April 2020, the EC is due to present a proposal of budget and coronavirus plan. It is an understatement to say that expectations are very low. The total amount mobilized could reach €1 trillion, which is quite substantial, but as it is always the case with the EU the devil is in the detail. The EU has often the bad habit to re-classify /re-direct already planned expenditures or to include private funding that is not yet on the table, as was the case with the Juncker plan, which makes the real package often much smaller !

On the upside, the EC should clarify a bit the toxic debate between loans and grants, though final approval is up to member states. It means that nasty discussions behind closed doors about the financial mechanism are not over yet. On a final note, it is highly likely the EC will unveil a list of sectors that could benefit from the recovery package based on at least the three following criteria: the European scope of the market, restoring supply chain resilience and avoiding distorting competition. Quite logically, airlines and the automotive industry should be amongst the main beneficiaries.